Biondi v. Scrushy
| Decision Date | 16 January 2003 |
| Citation | 820 A.2d 1148 |
| Parties | Edward R. BIONDI, individually and derivatively on behalf of HealthSouth Corporation, a Delaware corporation, Plaintiff, v. Richard M. SCRUSHY, George H. Strong, John S. Chamberlin, Charles W. Newhall, C. Sage Givens, Joel C. Gordon, Larry D. Striplin, Jr., William T. Owens, and Phillip C. Watkins, M.D., Defendants, and HealthSouth Corporation, a Delaware corporation, Nominal Defendant. James Bachand, derivatively on behalf of HealthSouth Corporation, a Delaware corporation, Plaintiff, v. Richard M. Scrushy, William T. Owens, and George H. Strong, Defendants, and HealthSouth Corporation, a Delaware corporation, Nominal Defendant. |
| Court | Court of Chancery of Delaware |
Ronald A. Brown, Jr., Prickett Jones & Elliott, P.A., Wilmington; Frank P. DiPrima, Convent Station, NJ, for Plaintiff Edward R. Biondi.
Joseph A. Rosenthal, Norman M. Monhait, Rosenthal, Monhait, Gross & Goddess, P.A., Wilmington; Jeffrey S. Abraham, Abraham & Associates, New York City, for Plaintiff James Bachand.
Andre G. Bouchard, Bouchard Margules & Friedlander, Wilmington; Michael L. Edwards, Lee H. Zell, Balch & Bingham, LLP, Birmingham, AL, for Special Litigation Committee of HealthSouth Corporation.
Richard L. Horwitz, Peter J. Walsh, Jr., Potter Anderson & Corroon, LLP, Wilmington; Patrick C. Cooper, Maynard, Cooper & Gale, P.C., Birmingham, AL, for Individual Defendants Richard M. Scrushy, George H. Strong, John S. Chamberlin, Charles W. Newhall, C. Sage Givens, Joel C. Gordon, Larry D. Striplin, Jr., William T. Owens, and Phillips C. Watkins, M.D.
Steven J. Rothschild, Stephen D. Dargitz, Skadden, Arps, Slate, Meagher & Flow, LLP, Wilmington, for Nominal Defendant HealthSouth Corporation.
STRINE, Vice Chancellor.
These derivative cases come before the court on a motion filed by the Special Litigation Committee (the "SLC") of the board of directors of HealthSouth Corporation, a Delaware corporation headquartered in Birmingham, Alabama.1 Distilled to their essence, the cases allege that certain directors of HealthSouth sold large blocks of the company's stock while in possession of material non-public information. In one of the sales - a $25 million sale by HealthSouth's Chairman and then-Chief Executive Officer, defendant Richard Scrushy - HealthSouth was the purchaser. According to the plaintiffs here (the "Delaware plaintiffs"), the market price for HealthSouth plummeted once the non-public information was announced. The Delaware plaintiffs brought this suit in order to remedy what they believe to be injuries suffered by HealthSouth because of the trades made by Scrushy and other HealthSouth directors before the company publicly announced the information.
The HealthSouth SLC now seeks to stay these actions on two independent grounds. First, the SLC contends that these actions should be stayed in deference to a firstfiled derivative action pending in the Circuit Court of Jefferson County, Alabama. Second, the SLC argues that these actions must be stayed to permit it to conclude its investigation and to decide what course of action is in HealthSouth's best interests.
In this opinion, I decline to grant a stay on either ground.
Because these cases and the prior-filed Alabama case are derivative actions in which the plaintiffs seek to represent HealthSouth, the McWane doctrine does not apply with full force here, and factors other than speed of filing are more important to the discretionary decision whether to grant a stay. In this instance, the prior-filed case was initiated by a hastily-field and cursorily pled complaint that barely alleged one of the claims raised by the Delaware plaintiffs as to only one of the transactions raised by them. Although purporting to be a derivative complaint, the prior-filed complaint did not attempt to plead demand futility with particularity. Indeed, most of the prior-filed complaint deals with issues not even raised in these Delaware actions, and the one overlapping claim seems to have been thrown in as a last-minute incidental addition.
By contrast, the Delaware complaints are obviously the product of diligent research and plead claims and demand excusal with particularity. In view of this fact, it is not apparent why HealthSouth and its stockholders should have their claims litigated under the less substantive prior-filed complaint simply because it was dashed off to court within twenty-four hours of the public disclosure of the allegedly non-public information. Although at some later stage a stay may be warranted either in deference to the prior-filed derivative action in Alabama or other related federal proceedings, the SLC has not convinced me that a stay is warranted now.
Nor do I believe that these actions should be stayed to give the SLC time to finish its investigation. Although the sensible general rule is that such a stay should ordinarily issue, these cases present a very unusual situation. Here, the undisputed facts make it clear that this court will never be able to defer to a decision by the HealthSouth SLC to terminate these actions. When combined with certain other circumstances, the SLC's strange conduct and troubling composition are - as described herein - too confidence-undermining for the SLC to meet the independence requirement of the Zapata standard. Therefore, it is evident that a stay would serve no rational purpose and should be denied.
Plaintiff Edward R. Biondi filed the first of the derivative complaints addressed in this decision on September 13, 2002.
In his complaint, Biondi spelled out with specificity both the nature of the claims he sought to press on behalf of HealthSouth and the reasons why demand on the HealthSouth board would have been futile. A second complaint was filed in this court by another plaintiff on October 8, 2002. Because Biondi's complaint was filed first and has more flesh on its bones, I refer to it - in its amended form - singularly as the Delaware Complaint. The Delaware Complaint was amended on November 1, 2002 and simply added further detail and clarification to an already thorough original complaint.
Although the Delaware Complaint is detailed, its central allegation can be summarized succinctly as follows. HealthSouth is a health corporation that runs hospitals and other health care facilities. As a result, HealthSouth earns a large portion of its revenue through health services that are ultimately paid for by the federal government, through programs like Medicare and Medicaid. Therefore, the level of payment these programs will make for certain services is very important to HealthSouth's bottom line. Relatedly, because these federal programs are extremely important in the overall American health care market, their reimbursement policies tend to influence private payors' policies towards reimbursement.
One of the federal reimbursement policies important to HealthSouth deals with the level of reimbursement to be granted for therapy services when a professional treats two or more patients with the same condition during the same time period, regardless of whether the therapy sessions are separate. In the Delaware Complaint, it is alleged that the Centers for Medicare and Medicaid Services ("CMS") had for the past two years given guidance that Medicare would soon reimburse a provider only for a group therapy rate for such services, rather than a higher individual therapy rate. In the face of this guidance about CMS's new position - what I will call the Group Rate Policy - HealthSouth continued to seek reimbursement at the higher individual rate for these therapy services and to base its forward-looking earnings estimates on the assumption that it would continue to receive individual rate reimbursement.
Since at least summer 2001, the complaint alleges, HealthSouth's board and key officers possessed information that CMS would eventually refuse individual rate reimbursement to HealthSouth under the Group Rate Policy and thereby materially lower the company's earnings. While possessing that information, however, the HealthSouth board continued to issue rosy earnings projections, based on contrary assumptions. Even worse, say the Delaware plaintiffs, members of the board sold large blocks of HealthSouth shares into a marketplace unaware of the profoundly negative effect the CMS's proposed reimbursement policy would have on HealthSouth. To wit:
On May 17, 2002, CMS issued a specific directive (the "Directive") implementing its Group Rate Policy, effective July 1, 2002. According to the plaintiffs, HealthSouth did not disclose this development to its stockholders or, as important, explain what effect the Directive would have on the company. The Delaware Complaint alleges that two members of the HealthSouth board, however, did take action knowing about the Directive. That action was to engage in the following sales of HealthSouth stock:
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